Markets are Inefficient for Non-Rival Goods

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Josh Farley at http://onthecommons.org/node/1179

"Markets in non-rival and non-excludable climate stability or clean air, do not allow individuals to choose how much of the latter to consume. Private property rights to fish, forests, and other structural components of ecosystems offer no incentives to provide desirable levels of the ecosystem services to which these resources contribute. For example, private ownership of mangrove ecosystems favors conversion to shrimp aquaculture, sacrificing the well documented ecosystem services of intact mangroves. Ironically, shrimp aquaculture systems may ultimately produce less seafood than intact mangroves, which serve a vital role as a nursery to many commercial seafood species, so the inefficiency is particularly evident . Private property rights to information lead to other obvious inefficiencies. AIDS drugs are priced much higher than the marginal cost of production, and as a result are used much less than they otherwise would be. As a result, the virus (which is a purely non-rival, non-excludable public bad) remains more prevalent in the human population than it otherwise would be, and all of society suffers. According to the bible, Jesus Christ performed a miracle by feeding the multitudes with a single loaf of bread and a single fish. Patents seem to perform the satanic inverse of this miracle by making a naturally inexhaustible piece of information artificially scarce. In short, even when they are possible, markets based on private property rights can be highly inefficient.

The problem is that economists seem to pay inadequate attention to another key characteristic of information and of most ecosystem services—the fact that they are non-rival. The use of a non-rival good by one person does not affect use by another (though some non-rival resources, such as roads, become rival at high levels of use). Unlike excludability, rivalness is a physical characteristic of a resource and not a policy variable. The marginal cost and hence efficient price for using an existing non-rival good is zero, because a positive price reduces use and hence benefits without reducing costs. Market allocation of non-rival resources leads to sub-optimal consumption, thus reducing economic surplus." (http://onthecommons.org/node/1179)